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Dalian invites foreign iron ore speculators

China will introduce foreign investors to trade in domestic iron ore futures from May 4, according to the country’s securities regulator.

The iron ore futures are traded on the Dalian Commodity Exchange, which rolled out rules in late March to guide foreign investors to participate in the market and took a market test earlier this month.

Introducing foreign investors into the domestic iron ore futures market will help develop a widely accepted price benchmark and boost global iron ore trade, according to the Dalian Commodity Exchange.

What will this do? The opposite of what theory says it should. Futures are supposed to smooth volatility in markets by enabling hedging. In practice they do the opposite by enabling synthetic gambling on the underlying commodity price which over time comes to drive rather than hedge it.

Since Dalian futures were introduced for iron ore, volatility in both the price and inventory cycles for iron ore has rocketed. This will make it worse still with lower lows and higher highs. At this stage of the cycle it will be the former before any experience of the latter. Perhaps the locals would like to offload some dud contracts beforehand.